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I have been a Certified Financial Planner™ Professional for 14 years and I have been reviewing a lot of tax returns recently because of the Tax Cuts and Jobs Act. The majority of my clients live in Texas, one of the seven states with no state income tax. The other states with no state income tax are Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming. (Tennessee and New Hampshire tax dividend and investment income, but don’t tax earned income.)
In my 1040 reviews, I have seen five clients in a row miss the General Sales Tax Deduction on line 5b of their Schedule A for Itemized Deductions. After seeing five intelligent, successful people with college degrees miss this important deduction and pay too much in Federal Income taxes, I decided to investigate.
I logged into Turbotax.com with one client to see what could be causing so many people to make the same mistake. When you click Deductions and Credits on the top menu bar, the software shows your previous year’s deductions you took like property tax, charitable gifts, and mortgage interest, in a blue section. Below the blue section is a section called All Tax Breaks. Under that section is a section called Estimates and Other Taxes Paid next to the green calculator. Inside of this section people who live in the seven states without income taxes need to click Sales Tax -> Easy Guide -> and enter their sales tax rate. The software will then calculate the allowed sales tax deduction for you if you didn’t keep receipts (who really has time for that). If you made a large purchase such as a car or boat, you are allowed to add the sales tax from the large purchase to the calculated sales tax deduction.
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My guess as to why my small sample size of five clients missed this deduction is that the software doesn’t have a pop up screen to tell people in the seven states without income taxes they should be taking this deduction. To TurboTax’s credit, you can dig into the deductions and add this to your Schedule A. The issue is that you need to know to look for the deduction in the first place. My client amended her tax return and will receive a $213 refund on an Adjusted Gross Income of $61,000 for 2016.
If you live in a state without income taxes and are able to itemize your taxes, please take a minute right now to look at line 5 on your Schedule A (usually the third page of your tax return). If it is blank, you are welcome—I just saved you some money. If you missed this, you generally have 3 years from the date you filed your original return to file an amended return. If you filed your 2014 tax return on or before 4/15/2015, you have until 4/15/2018 to amend it. You will also want to make sure to follow my instructions above to make sure you do your 2017 tax return correctly.
This link will explain how to use TurboTax to create the 1040x forms needed to amend your return. We found that amending the 2016 return wasn’t that bad. In order to amend the 2015 and 2014 returns, you have to download the previous year’s versions of the software. Alternatively, you can print the 1040x from the IRS website here and go here to calculate your sales tax for line 5 of Schedule A. Hopefully I helped some of you get some more money back from the IRS. Many of my clients will not be able to itemize at all in 2018 and beyond because the standard deductions are going up from $6,350 and $12,700 in 2017 to $12,000 and $24,000 in 2018 for Singles and Married Filing Jointly respectively. Make sure you are getting this deduction in 2017 and amend your three prior year returns if applicable.